Tuesday, June 14, 2011

Fuel Up On Oil Service Stocks: BP, DRQ, IEZ, IO, PBR, PXJ, SLB


Despite the fact that oil prices have risen to more than $100 a barrel, long-term energy demand is still rising. The Energy Information Administration (EIA) estimates that totalworld-wide energy consumption will increase 49% by 2035. Driven by new sources of demand in the emerging world, non-OCED nations will use 63% more energy than their developed counterparts by 2035. While alternative and renewable energy sources will increase in acceptance and use, traditional energy sources with still form the backbone of consumption. With much of the world's "easy" oil already found, one sub-sector stands to benefit immensely.

Still More Needed
The global economy currently requires about 90 million barrels of crude oil a day. However, according to a report by analysts at Schlumberger (NYSE:SLB), the world will require nearly 126 million barrels of oil a day by the end of the next 2 decades. This 36 million barrel difference according to Schlumberger "still needs to be developed or even found". With many mature oil fields showing signs of declining production, new technologies will need to be created in order to squeeze more barrels out of these wells. In addition, about half of all the new oil and gas fields recently discovered have been made offshore, specifically in deep waters.BP's (NYSE:BP) recent "mishap" in the Gulf of Mexico helped underscore that new deeper offshore wells come with added risks and responsibilities. Finding new sources of supply, new deepwater wells, hydraulic fracking and safety initiatives constitute long-term demand for the oil services sector.

With billions needed to be spent to find and extract oil in harsh environments, the oil services sector is poised to benefit. Capital expenditures by oil and gas industry are expected to increase 15% throughout 2011. Brazilian energy giant, Petrobras(NYSE:PBR), will be among the global leaders on spending for drilling rigs and other equipment, as they develop fields off Brazil's coast. Globally, day rates for mid-water depth semi-submersibles have been increasing and rates for ultra-deepwater rigs have also risen. In the more mature Gulf of Mexico, much is needed in the way of repair and updating as the subsea infrastructure is decades old.

Betting on the Service Sector
With the continued need for more energy, the oil services sector will undoubtedly benefit. Providing the technological innovation in the energy sector, these picks and shovels plays make an excellent focus for an energy portfolio. Both the iShares Dow Jones US Oil Equipment Index (NYSE: IEZ) and SPDR S&P Oil & Gas Equipment & Services(NYSE: XES) provide investors with easy access to the energy sub-sector and have performed well over the last year. Individually, investors have plenty of options for adding the sector to a portfolio. Here a few picks:

Finding those new oil deposits falls upon the seismic contractors. These companies use seismic data and map potential and recognized hydrocarbon formations. French companyCGG VERITAS (NYSE: CGV) is one of the largest independent firms in the sector, but investors may want to bypass it and stick with the smaller fries. Both small caps, ION Geophysical (NYSE: IO) and OYO Geospace (NASDAQ: OYOG) have seen their bottom lines grow as well as their shares prices. Both are small enough to acquisition targets as well.

Drilling in new environments requires new advances in drilling technology. Dril-Quip(NYSE: DRQ) manufactures all the drill bits, valves, risers and a host of other equipment needed for every oil well. Shares of the company have surged nearly 70% over the past five years and analysts predict that this trend will continue throughout 2011 as energy demand maintains its upward trend. Similarly, competitor National Oilwell Varco (NYSE: NOV) has seen its star shine as well.

Bottom Line
As global energy demand continues to trend higher, more pressure is being placed on finding new sources of supply. While alternatives will take more market share, traditional energy will continue to be a dominate force in the future. The oil services sector offers investors a way to play the advances in new technologies that will be required to extract these resources. Funds like the PowerShares Dynamic Oil & Gas Services (NYSE:PXJ) make excellent long-term additions.

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